you prefer a market crash then something about a 60 hit on the market.
OK. So first we have to separate my personal interests from my fears for my fellow Americans in general.
Let's start with me, because my interests are most important.
ME:
If the Fed REALLY tries to head-off inflation starting next year, and is either braver than I thought or simply mis-calculates the repercussions, I believe it can not help but cause a massive stock market collapse on the eventual level anywhere between 50-80%. Historical metrics would suggest something ~70% I think.
I want to early retire in about 2 years. I can't tolerate that level of hit to my investments, even if it recovers again in 6-12 years.
I think inflation is just getting started and is already ~6.7% (it's really more than that but that's another discussion). I expect it to continue accelerating. It won't happen all in one day. It might get up to 10% through next year. Maybe 15% the next. It may not be linear. I'm in the process of moving to all cash position for some amount of time until I get more clarity into how this historic unwinding of free Fed money effects the stock market. I think I know what will happen, but I could be wrong.
I realize that sitting in cash next year, I am accepting a loss due to inflation. Maybe 10%. If the Fed tries to raise a 1% and the market starts to craters 60%, my 10% inflation loss might look cheap in comparison and I'll soon start seeing much cheaper stocks to buy on the way down with the majority of my capital I preserved. Yes, I’m a ghoul. If the market collapses and I’ve preserved the majority of my capital, I will start picking through the rubble and dead bodies and find some really great deals to buy much more profitably.
If the Fed gives up and decides to print forever, I'll have to consider dipping back in by the end of the year, but maybe with a much more conservative hedged position than I have been in over recent years. It’s nuts, but if the Fed it determined to work the air pump forever, I might as well see if I can siphon some more of that off, but from a careful position wearing my parachute at all times. If they do that, I don’t think inflation will stop on it’s own so I see risks of hyper-inflation. But I hate to be involved in the stock circus in this state because it would also be vary risky even with a parachute.
It’s easier for me to survive a stock market crash. I’ll soon be completely liquid. It’s hard to avoid, the hyper-inflation without getting into stocks or some other asset (bonds, real estate, art, commodities, etc). Problem there is, the deranged Fed policy has created a dangerous asset bubble in every class not cash. We have an EVERYTHING BUBBLE! There is no where safe to go. It’s down to risk management and picking whether you prefer your nuggets cut off or your fingers and toes smashed into pulp.
So from my point of view, I’d prefer the Fed to make a heroic effort to tame inflation and crash the market (just as soon as I’m all cash
), at which point I could avoid hyper-inflation by moving back into the market at valuations that I consider a much more reasonable investment and use market gains to shield myself from inflation that might still not be tamed even after they’ve crashed the market. (The market might have crashed before they’ve even gotten rates to 2% and they need ~4% to really pull stop inflation. )
Bottom line, I think there is far, far, far, far too much complacency in the market right now and many retail investors are not putting any thought into just how unprecedented a historic inflection point is that we are hurtling towards. But now we have a timeline for important steps in that inflection. Tapering begins in Jan. Sometime Mar-May they will begin to attempt to reverse a long, deranged, unprecedented loose money policy and no one can be sure of how that unknown risk plays out. But it scares the bejebus out of me.
My best case is the Fed craters the market as soon as I’m all cash, and I then start moving back in to profit off the carnage and earn a positive return above any inflation.
If by the end of next year, inflation has not continued to increase and the Fed has successfully managed 3 rate hikes up to 1% and the market doesn’t blink, then I’ve mis-calculated somehow and I’ll have to stop and form a new plan. I can’t sit in all cash for ever at any level of inflation.
For Average Americans:
Most average Americans are not heavily invested in the stock market. The economy is not the stock market. Wall Street can crater without necessary bringing Main Street down with it. Main Street collapsing will usually crater Wall Street though. Most average salaries have not increased in real terms (minus inflation) since the 80’s. Average American’s have been getting proportionally poorer over the decades.
In your grand-daddy’s day a hard working Joe (non-college) working a steady job could raise a family in a modest home with the wife staying home full time to raise the kids. That’s really hard to do nowadays. Some do, but it’s a lot harder.
If I’m Elon Musk, 20% inflation might mean I can only afford two new yachts that year instead of three. For an average Joe, it might mean I can’t afford to send my kid to college or maybe I lose my house in foreclosure. Inflation is an insidious hidden tax on every single goods or service he buys. It impoverishes him daily.
He might not even notice a stock crash.
So for average American’s, I’d also prefer the taming inflation even if the cost is a smoldering stock market filled with wreckage.
Screw Elon. If his stocks crash, he can sell one of his yachts.
So yeah, I’d prefer the Fed to do WHATEVER it takes to tame inflation. That will almost certainly crash the stock market. I'll prefer that over hyper-inflation, because I’ll be sitting in cash, licking my chops at the buying opportunities as soon as the smoke clears.
